iQiyi (NASDAQ:IQ) stock continues to frustrate investors. Despite the company’s strong position in China’s streaming market, IQ stock continues to drop.
iQiyi’s strength in China has become a double-edged sword for IQ stock. Without a doubt, IQ’s large subscriber base and partnership with Netflix (NASDAQ:NFLX) have strengthened the Chinese company. However, its connection to China also hampers IQ stock.
IQ Stock Probably Won’t Reach Netflix-like Valuations
IQ stock has trended downward since hitting a high of $29.18 per share in February. Now trading at just over $16 per share, iQuyi stock has lost 45% of its value since hitting that peak.
As a result, many investors who bought IQ stock hoping that it would become the next Netflix have been disappointed. I find it hard to find fault with the conclusion of InvestorPlace columnist Chris Tyler, who argues that iQiyi stock is truly not the next Netflix.
But Netflix and iQiyi may influence one another. Aynne Kokas, professor of Media Studies at the University of Virginia, argues that iQiyi may indirectly influence Netflix through their content-sharing relationship. Because of the content-sharing deal, Netflix produces content that meets standards set by Chinese regulators.
But the partnership has not convinced investors to give IQ stock a similar valuation to Netflix stock. Whereas NFLX stock trades at almost 7.3 times its sales, the price–sales ratio of iQiyi stock comes in at less than 3.1.
The China Factor
Due to rules against Americans owning shares of Chinese companies, the owners of IQ stock do not own shares of iQiyi. Instead, those who buy IQ stock actually own shares in a holding company entitled to a percentage of IQ’s profits. Other Chinese stocks, such as Alibaba (NYSE:BABA) and iQiyi’s parent, Baidu (NASDAQ:BIDU), have always traded at a huge discount to comparable U.S.-based companies.
Other concerns may also explain the discrepancy between the valuations of NFLX and IQ stock. Despite iQiyi’s lack of U.S. exposure, the U.S.-China trade dispute fosters doubts about IQ stock. InvestorPlace contributor Luke Lango also mentioned that government-imposed investment restrictions could lead to the delisting of IQ stock. In any event, IQ and other Chinese stocks have failed to attract premium multiples.
Moreover, iQiyi stock cannot seem to find a bottom. In recent months, it twice appeared to find a floor before falling back and setting a new low. At this rate, it could soon retest its 52-week low of $14.35 per share.
Furthermore, much as Netflix has attracted competitors, iQiyi faces the same issue. In a previous article, I mentioned that both Alibaba and Tencent (OTCMKTS:TCEHY) have launched competing streaming services. That may explain the slowing ad revenues and the lackluster sequential revenue growth that IQ suffered in Q2.
The longer-term outlook of IQ stock is better. It still has the backing of Baidu, for one. Also, analysts’ average year-over-year revenue growth forecasts of 10.8% this year and 21.4% in fiscal 2020 appear to be promising.
However, IQ won’t be profitable for years. In the near-term, until IQ stock appears likely to stay above its 52-week low of $14.53, investors should stay on the sidelines.
Final Thoughts on IQ Stock
Neither IQ’s sway over Netflix’s content nor the vast potential of the Chinese market can make iQiyi the next Netflix. Geopolitical concerns and worries about whether IQ stock accurately reflects the company’s performance have likely kept a lid on the stock’s multiples.
Moreover, IQ stock remains in a sustained downtrend. iQiyi stock has not been able to rise a great deal above its 52-week low. Until that changes and IQ’s path to profits becomes more certain, investors should probably watch iQiyi stock instead of buy it.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.